Is China Travel International Investment Hong Kong (HKG:308) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that China Travel International Investment Hong Kong Limited (HKG:308) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for China Travel International Investment Hong Kong

What Is China Travel International Investment Hong Kong's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 China Travel International Investment Hong Kong had debt of HK$1.18b, up from HK$656.4m in one year. But on the other hand it also has HK$3.37b in cash, leading to a HK$2.19b net cash position.

A Look At China Travel International Investment Hong Kong's Liabilities

The latest balance sheet data shows that China Travel International Investment Hong Kong had liabilities of HK$5.01b due within a year, and liabilities of HK$1.78b falling due after that. Offsetting this, it had HK$3.37b in cash and HK$664.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$2.75b.

China Travel International Investment Hong Kong has a market capitalization of HK$9.86b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, China Travel International Investment Hong Kong also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if China Travel International Investment Hong Kong can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, China Travel International Investment Hong Kong reported revenue of HK$3.5b, which is a gain of 44%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is China Travel International Investment Hong Kong?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months China Travel International Investment Hong Kong lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of HK$1.6b and booked a HK$116m accounting loss. With only HK$2.19b on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, China Travel International Investment Hong Kong may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with China Travel International Investment Hong Kong , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.